Do you really understand the concept of product value?

There are two critical lenses through which a great PM needs to look to decide what functionality a product should have — value and complexity.

Product value is the benefit that a customer gets by using a product to satisfy her needs minus associated costs. Complexity is the effort associated with delivering such a product to the customer.

In this post I will focus on value. We’ll take on complexity later. 🙂 In the meantime, check out a great video on the relationship between value and complexity.

Value might seem like a pretty straightforward concept, but let’s see what hides behind these five innocent letters.

Absolute vs. relative value

Value that a product provides depends on two aspects: the importance of a goal that a customer is trying to achieve and the solution alternatives that are available to her in the marketplace. Absolute value quantifies how well a product meets customers needs whereas relative value puts the product value in the perspective of the available solution alternatives. Understanding of both is critical to making the right product decisions.

Ideal, diminishing and declining value

Products typically consist of a set of features that, combined together, deliver total product value. A simple logic could thus guide us along the lines of “the more features, the better product.” There is a caveat though. This logic assumes that every new feature would not negatively impact the experience at all. But let’s look at a graph with three value curves:

Under ideal circumstances, every new goal that a product or feature satisfies or every improvement to an existing goal increases overall aggregate value of the product (I am making a simplification here, different features can have different value and the value could even grow exponentially thanks to some synergistic effect, but linearity will suffice for the sake of my argument.)

In reality though, it is impossible that we would be able to just keep satisfying new goals by adding new features. Typically a product has a few key features that deliver that vast majority of the aggregate value. Adding additional features increases the aggregate value only marginally.

The third curve demonstrates the danger of diminishing a product’s value by introducing more features. This is a situation where piling more features into a product negatively influences the user’s ability to achieve her goals. The negative impact is typically the result of higher cognitive effort (achieving a goal requires more thinking) or simply the added time required to carry out some task (due to increased product complexity).

The lesson learned here is that you should add a new feature into a product only if the aggregate value increases. And you should really strive not to negatively impact the current user experience at all. Software products have a huge advantage here, because they can take advantage of dynamic interface personalization, progressive disclosure, and other design techniques to mitigate the negative impact of adding more functionality.

Real vs. perceived value

Another important important concept to understand is real vs. perceived value. The value I talked about so far is similar to the concept of real value — total value that a product objectively offers to a customer, or the total value a customer could reap if using all functionality optimally. But counter to the name, things work a little differently in the real world.

For starters, the initial product value may be perceived differently by a prospective customer depending on how effective you are at marketing it. If your demos, messaging, onboarding, and trial are on point, the customer really understands the value your product can offer her from the getgo.

If your marketing is less effective, the initial value as perceived by your customer will be lower. The customer may eventually figure out that the product offers more than she expected, which is a good outcome, but you may acquire fewer customers than you could have if your marketing was spot on, and fewer users may find success.

On the other hand, if you over-promise and under-deliver the customers will find out and will be disappointed. This situation is doubly negative because missing value is perceived as a loss, and as research on loss aversion shows, losses are twice as powerful, psychologically, as gains. The negative impact will be thus multiplied and you can expect those early advocates to become a mob of detractors 🔥.

Value of a habit

Ok, so now we’ve covered the concept of the real vs. perceived value of a product. That means customers will choose the product with the highest value at any point in time, right? Well, it is true that if a prospective customer is deciding between two options, she will choose the one that will offer more perceived value. But what if she is using another product already and needs to switch? A lot has been written about switching costs, but I want to focus on two specific parts of these costs — the habits and the learning curve.

BJ Fogg and Nir Eyal of Stanford have done some great work on habits. If you haven’t read Nir’s book Hooked, get it now! I’d also recommend BJ Fogg’s model.

It turns out that the total value of a product can actually increase over time even if the functionality does not change. How? The users settle into strong habitual behavior surrounding a product — a habit or a routine that they conduct repeatedly with minimal cognitive effort. And as they learn and get used to the product, they come to fear the unknown of new products. (Btw check out a great jobs-to-be-done diagram on forces pulling users towards and from a new behavior/product. More on jobs-to-be-done some other time.) This is how total value of a product (real + perceived) fluctuates over time.

Let’s assume that a customer chose product B because of it’s highest perceived value (unaware of the ore valuable product C, which she might have chosen otherwise). She starts using the product and over time, makes a habit of using it to achieve her goals. During the habit forming phase, the association between her need to achieve a goal (trigger) and her action to use product B intensifies. The cognitive effort during the process decreases and the total value she reaps from the product thus increases.

This concept is important to understand because it also means that if you decide to start competing with an existing product, it is not enough to deliver more value simply on a product to product basis. You need to build a product that will be so much better that it will be worth it for the customer to give up their existing habits and overcome the fear and burden of learning your new product.

A study by John T .Gourville, a professor at Harvard Business School, states that the difference in value between a new product and existing product must be up to 900% for users to adopt the new product. I highly recommend reading the full case study (it costs a few bucks, but will get you a lot father than two cups of coffee).

Making sense of it all

So it turns out that the concept of product value is not that simple after all. Only when you’re familiar with all aspects of it will you build products that provide higher relative value than the alternatives. You’ll know to include only features that marginally increasing the total value. You’ll design products to form habits and thus further increase users’ perception of your product’s value over time. And you’ll get your marketing messaging right and successfully communicate the value proposition of your product!

How do you think about product value? I’d love to hear about it. Add a comment or send us a message!